Australia and China are talking up a major trade deal to be agreed by the end of the year but, before then, the relationship between the two countries needs a little rebuilding.

Transcript

SARAH FERGUSON, PRESENTER: On his whirlwind north Asian tour Prime Minister Tony Abbott faces his toughest test when he arrives in China tomorrow.

Last year relations between Canberra and Beijing were under huge strain over Australia siding with Japan over a regional security issue. Both sides are talking up the potential for a major trade deal by the end of the year. But first there's some rebuilding needed.

China correspondent Stephen McDonell reports.

STEPHEN MCDONELL, REPORTER: In China this week Prime Minister Tony Abbott will have talks with Beijing's top two leaders amongst others. There's plenty of work to do.

DAVID HALE, GLOBAL ECONOMIST: Well it's a balancing act between Australia's clear economic interest now, vis-a-vis China and its traditional dependence on the US for security. And there are two things going on; first, China's becoming more important and will become over time obviously a greater military power in the region and the US now has the potential of going into serious decline.

STEPHEN MCDONELL: United States based economist David Hale recently prepared a report looking at China's rapid re-emergence as a major power. He thinks this will become Australia's largest foreign policy challenge this century.

DAVID HALE: If we take a 15 year view Australia may not be able to count on the US for security guarantees it's had going all the way back to 1941. So Australia must be in a balancing act. China recognised the rise of China's great power, adjusting to that and also hoping the US will not become a totally weak military power unable to offer security guarantees in 15 years' time.

STEPHEN MCDONELL: China's military expansion has many in the region worried, including Australia. At the end of last year when Beijing declared a new air defence identification zone covering islands also claimed by Japan, Australia called in the Chinese ambassador for a dressing down. It would infuriate Beijing.

PROF. HAN FENG, NATIONAL INSTITUTE OF INTERNATIONAL STRATEGY (TRANSLATED): Australia overreacted on this issue. It tried to support America's criticism of China and at the same time it tried to be independent in Sino Australia relations. They didn't control the situation very well.

STEPHEN MCDONELL: Australia's Foreign Minister was the first to bear the brunt of the Asian giant's anger. On a visit to the Chinese capital, Julie Bishop sat down with her counterpart for what are normally pleasantries in front of the media, but with the cameras rolling, Wang Yi let her have it.

WANG YI, CHINESE FOREIGN MINISTER (TRANSLATED): What Australia has said and done with regard to China's air defence identification zone has jeopardised bilateral mutual trust and affected the sound growth of bilateral relations.

Across all of Chinese society, the general public are deeply dissatisfied.

STEPHEN MCDONELL: She too had to step up.

JULIE BISHOP, FOREIGN MINISTER: I must take issue with you on the matter of the East China Sea.

(Talking to reporters) Friends are able to discuss issues, air their differences and move on.

Australia will China will not always line up exactly in the same place on every issue. Australia has its view, its position and we should never be afraid to stand by our values and our views.

PROF. HAN FENG (TRANSLATED): Lots of Chinese people are worried that because of this special relationship with the US, Australia will stand on America's side in international politics and ignore the facts of right and wrong in the region.

STEPHEN MCDONELL: Professor Han Fung specialises in China's relations within the Asia Pacific, including Australia. He thinks Tony Abbott has a challenge convincing the president Xi Jinping that Australia has a mind of its own.

PROF. HAN FENG (TRANSLATED): I'm not saying that China doesn't trust Australia, but China is worried that in regional politics there should be right and wrong, not decisions built on the relations of allies.

PROF. KERRY BROWN, EXECUTIVE DIRECTOR, CHINA STUDIES CENTRE: I think China's always aware that Australia's biggest strategic relationship is with the United States. I don't think it's a question Australia making choices, but it means that it has to have a clear vision of where its interests are in terms of the economy and that's with China or where it's political and geopolitical interests are and that's still with America.

STEPHEN MCDONELL: If Beijing's relations have been tense with Canberra, you wouldn't have thought so during the opening session of the National People's Congress in March.

(Sound of Premier Li Keqiang speaking)

STEPHEN MCDONELL: In his state of the nation vision for the next 12 months, premier Li Keqiang said China was hoping to sign a free trade deal with Australia. It would be China's most significant such agreement to date. Yet analysts are warning Australia to be careful.

PROF. KERRY BROWN: The free trade agreement is a big deal and it's going to be a hard one because China is very good at signing deals in its own favour.

DAVID HALE: Everything Australia produces China needs. China now has the world's largest steel industry, 700 million tonnes. They need lots of Australian iron ore. They also have a very great appetite now for food. They need more and more corn as they increase their production of beef. They need more and more soybeans. They need a whole range of commodities but there's no doubt that if China had a very severe recession, that would also produce at the same time a major downturn in Australia.

STEPHEN MCDONELL: This country's enormous economic potential remains crucial for Australia. But tapping into it does involve something of a juggling act. China's ever emerging nationalism will see it at loggerheads with others and Australia is going to be drawn into these disputes. But visits like that by the Prime Minister this week allow for face to face meetings with the Chinese leadership. Meetings that the diplomats at least think will bring dividends in the future.

PROF. HAN FENG (TRANSLATED): Prime minister Howard had some problems with China when he first took office but later on both sides established smooth relations. I think Mr Abbott wants to inherit what Mr Howard eventually achieved in Sino Australia relations, but we still have some issues to be settled.

STEPHEN MCDONELL: Despite moments of mistrust, the hunt for a missing Malaysia passenger jet has shown large scale cooperation is possible between China and Australia.

Much has been done in recent years to encourage military to military links between the two countries and perhaps this is now paying off.

Yet the relationship is a difficult one to manage and both sides will be working on it over the coming days.